Embedded Software Development Tools

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1 Embedded Software Development Tools Addressing the M&A Needs of Technology and Telecommunications Professionals July 2011 Inside This Issue M&A Market Update Industry Snapshot Industry Snapshot Publicly-Traded Embedded Semiconductor and Software Companies Embedded Technology M&A Deals Spring 2011 Deal Highlights Technology mergers and acquisitions are off to a strong start in According to Ernst & Young s quarterly report, Global Technology M&A Update, technology mergers & acquisitions deals grew substantially during the first quarter of The number of deals increased 26% to 794 and total value increased 124% to $27 billion. Similarly, Mergerstat shows an 18% increase of total deals from April 2010 to 2011, rising from 8,060 to 9,475, with most of the growth coming from the middle market deal sizes ranging from $25 million to $250 million. In the embedded technology market, merger activity is strong as well. In 1H2011 we tracked 31 M&A transactions in the embedded space, with an average deal size of $148 million. The embedded segment generating the most deals was Software Development Tools, with 18 transactions. The embedded segment generating the largest deals was Semiconductors, where transactions averaged $626 million. Selected Transactions Embedded Software Development Tools & Services Semiconductors & Hardware Devices & Infrastructure About Us: The McLean Group is a national investment bank serving middle market businesses. For more information, visit The McLean Group, LLC 7900 Westpark Drive Suite A320 McLean, VA User interface/gui and 3D imaging software tools Code development tools Operating system software IP Telephony (VoIP), and video software DSP software Communications and networking middleware General purpose processors Digital signal processors Wired and wireless communications Smart phones Networking infrastructure IP phones and VoIP equipment Consumer electronics Tablet computers

2 Embedded Index: Public Company Valuations The McLean Group s embedded index represents a representative sample of publicly-traded companies that are significant players in the embedded technology market. This list includes both semiconductor and software companies that sell into endequipment markets such as smart phones, networking infrastructure, defense electronics, and other consumer devices. Currently, EV/EBITDA valuations are very healthy, with an average multiple of 14.7x and an EV/Revenue average multiple of 3.2x. Publicly-Traded Embedded Semiconductor and Software Companies Semiconductor Firms Enterprise Value LTM EBITDA LTM Revenue EV/ EBITDA EV/ Revenue Analog Devices $9.60B $1.21B $3.01B 7.91x 3.19x ARM Holdings, plc $35.19B $197M $655M x 53.65x Broadcom $16.1B $1.14B $6.97B 14.16x 2.31x Cadence Design Systems $2.70B $111M $980M 24.3x 2.76x Cavium Networks $2.03B $36M $228M 56.34x 8.87x Freescale Semiconductor Holding 1 $10.2B $1.07B $4.63B 9.55x 2.20x Imagination Technologies $123.6B $15.8M $86.9M 7840x 1423x Intel $110B $21.2B $46.2B 5.19x 2.39x Mentor Graphics $1.70B $118M $915M 14.44x 1.86x MIPS Technologies $278M $27.4M $87.7M 10.17x 3.17x Nvidia $8.09B $406M $3.50B 19.94x 2.31x Qualcomm $82.30B $5.28B $12.9B 15.6x 6.39x Synopsys $3.04B $295M $1.47B 10.29x 2.07x Texas Instruments $36.72B $5.28B $14.15B 6.96x 2.59x Embedded Software Firms Enterprise Value LTM EBITDA LTM Revenue EV/ EBITDA EV/ Revenue Adobe Systems $16.1B $1.42B $3.97B 11.34x 4.06x Autodesk $8.35B $406M $2.01B 20.57x 4.17x Bsquare $44.4M $8.39M $106M 5.29x 0.42x Google (Android) $135B $12.2B $31.1B 11.14x 4.35x Microsoft $168B $68.6B $30.1B 5.58x 2.45x National Instruments $2.98B $920M $173M 17.2x 3.24x Nuance Communications $6.61B $1.21B $242M 27.32x 5.48x Average EV/EBITDA x Average EV/LTM Revenue 2 3.2x Source: Capital IQ / Yahoo Finance Data as of May 25, Freescale data as of May 27, 2011 due to recent IPO. 2 EV/EBITDA and EV/Revenue Ratios above do not include ARM Holdings or Imagination Technologies data. 3 Multiple vendors may compete primarily in one market but also represent another sub-segment. Examples include: Intel owns Wind River Systems, Google owns Android, and Cavium owns MontaVista. Separate operating results for the embedded software portion of these companies are unavailable. #2

3 Embedded Semiconductor Company Valuations Analog Devices Broadcom Cadence Cavium Freescale Intel Mentor Graphics MIPS Nvidia Qualcomm Embedded Software Company Valuations Synopsys Texas Instruments EV/Revenue EV/EBITDA EV/Revenue 5 EV/EBITDA 0 Adobe Systems Autodesk Bsquare Google Miscrosoft National Instruments Nuance Embedded Technology M&A Deals Spring 2011 Merger and acquisition activity remains strong in the first half of 2011 in the embedded space. While software deals counted for more than half of the 31 deals we tracked, their average size was significantly smaller than the average deal size of semiconductor and hardware companies in the embedded space. The average size of tracked software deals was $46 million, while the average semiconductor deal closed at a much higher $626 million. Given the size of most of these deals, such multiples as EV/ EBITDA typically are unavailable, and the limited number of available multiples does not suffice to make useful comparisons. #3

4 Number of Embedded M&A Deals by Segment Segment # Deals Average Deal Size ($M) 1 Software 2 18 $46 Semiconductors 7 $626 Hardware 6 $96 # Deals 20 Average Deal Size ($M) $ $ $400 5 $200 0 Hardware Software Semiconductors $ - Hardware Software Semiconductors When broken down further by vertical market, most transactions have been completed in the software development tools market, followed by video & media and wireless. Number of Technology M&A Deals by Vertical Market Segment Vertical Market # Deals Average Deal Size ($M) 3 Hardware Storage 1 $327 Hardware Systems 2 $69 Hardware Video & Media 3 $37 Software Development Tools 13 $44 Software Security 1 N/A Software Video & Media 3 $50 Software Wireless 1 N/A Semiconductors EDA 2 N/A Semiconductors Security 1 $288 Semiconductors Video & Media 1 $645 Semiconductors Wireless 3 $190 1 Includes only transactions where deal size was disclosed. 2 Software average deal size does not include Skype. 3 EDA average deal size does not include Mentor Graphics. #4

5 # Deals by Vertical Development Tools EDA Security Storage Systems Video & Media Wireless Average Deal Size ($M) by Vertical $350 $300 $250 $200 $150 $100 $50 $ - Development Tools EDA Security Storage Systems Video & Media Wireless # 5

6 Deal Highlights Highlighted Mergers & Acquisitions Microsoft acquired Skype for $8.5 billion. The Skype acquisition, reflecting further consolidation of VoIP technology to consumers and enterprises, also is Microsoft s largest acquisition to date. RadiSys acquired Continuous Computing for $120 million. The deal included $73 million in cash and 3,666,667 shares of RadiSys common stock. Continuous Computing develops ATCA-based hardware systems used in communications markets, and also the Trillium protocol stack, acquired from Intel in Atego acquired HighRely, a leading provider of high reliability engineering solutions, services and tools for critical embedded product and systems development. HighRely is known as a a market leader in DO-178B and DO-254 certification and training services. Intel acquired SySDSoft, based in Cairo, Egypt. SySDSoft designs state-of-the-art IP solutions in the software stack and physical layer domain, and RF/analog circuits embedded in mobile platforms. The acquisition is expected to accelerate Intel s efforts in 4G LTE. Autodesk acquired Scaleform for $36 million in cash. Scaleform is a middleware and user interface (UI) tools company that has aided in the development of more than 800 games for a variety of hardware platforms, including Microsoft Xbox 360, Nintendo Wii and Sony Playstation 3 (PS3). Autodesk acquired Blue Ridge Numerics for $39 million in cash. Blue Ridge develops simulation software that allows engineers to design and manufacture products that are prepared for real-world conditions. Autodesk will integrate Blue Ridge Numerics into its Manufacturing Industry Group. National Instruments acquired AWR Corporation for $58 million. AWR is a leading supplier of electronic design automation (EDA) software for designing RF and high-frequency components and systems for the semiconductor, aerospace and defense, communications and test equipment industries. Digia PLC acquired the Qt commercial licensing and services business from Nokia. Nokia had acquired the Qt platform from its $153 million acquisition of Trolltech in The divestiture is a strategic realignment for struggling Nokia, which has begun a migration from Symbian and Qt to Windows. Digia will support the roughly 3,500 companies that currently use Qt commercially. Netscout acquired Psytechnics, a provider of quality management software for IP voice and video. Its installed base manages more than a million Internet telephony users in the US and Europe. #6

7 Date Selected Transactions The following represents transactions in the embedded market for Spring Because many of these are smaller private transactions, such transaction data as Transaction Value, Enterprise Value (EV) or EBITDA may not be provided. Target Total Transaction Value ($M USD) Buyer Segment Vertical Description 05/23/11 AWR Corporation $58.00 National Instruments Software Development Tools RF Design Software 05/16/11 Pliant Technology, Inc. $ SanDisk Corporation Hardware Storage Enterprise Flash Drives 05/12/11 Cryptography Research, Inc. $ Rambus Inc. Semiconductor Security Security Chip IP 05/10/11 Keynectis S.A. E.I.S. Euro-Information Services; Gemalto NV Morpho SA Software Security Security 05/10/11 Skype $8, Microsoft Software Application VoIP 05/10/11 Cadence Design Systems, Inc. Altos Design Automation, Inc. Semiconductor EDA 05/09/11 Icera $ Nvidia Semiconductor Wireless 05/03/11 HighRely Atego Software Development Tools Avionics, DO178B 05/03/11 Continuous Computing $ Radisys Hardware Systems Communications 04/23/11 Maestro Mobile Services e-zest Solutions Ltd. Software Development Tools Smartphone Application Development 04/01/11 RDDS Avionics Limited $2.41 Oak Manor Investments Ltd. Hardware Video & Media Video Survellience 03/28/11 Psytechnics Netscout Software Development Tools VoIP Quality Management 03/26/11 tinyhippos Inc. Research In Motion Limited Software Development Tools Mobile Application Development Tools 03/24/11 Accordent $50.00 Polycom Software Video & Media Video Content Management 03/22/11 Masterimage 3D, LLC $15.00 Samsung Venture Capital Hardware Various 3D Display Components 03/15/11 SySDSoft, Inc. Intel Mobile Communications Gmbh 03/08/11 SGI Japan, Ltd. $17.90 Silicon Graphics International Corp. Hardware Systems Semiconductor Wireless RF/Analog Circuits for Wireless Baseband 03/07/11 Nokia Qt Digia Plc Software Development Tools Qt Development Tools and Libraries 03/03/11 Rocket Pack Disney Software Development Tools Game Development Environment 03/02/11 Webia Technologies D2 Technologies Software Devlopment Tools Android-Based Set-Top Box Media Player 02/26/11 Lapis Digital VerticPortals Inc. Software Development Tools Mobile Flash Applications 02/23/11 Mentor Graphics Corporation $1, Semiconductor EDA EDA Development Tools 02/21/11 Zoran Corporation $ CSR plc Semiconductor Video & Media Audio and Video Compression 02/17/11 Blue Ridge Numerics $39 Autodesk Software Development Tools Engineering Simulation 02/15/11 Kinoma, Inc. Marvell Technology Group Ltd. Software Video & Media Mobile Media Players 02/15/11 Scaleform $36 Autodesk Software Development Tools Flash-Based UI Tools for Gaming 02/14/11 Conceivium Fixmo Software Wireless Mobile Device Management 02/09/11 SurfKitchen Limited Teleca AB Software Development Tools Mobile Internet Platform 02/05/11 Transpera, Inc. Tremor Media, Inc. Software Development Tools Mobile Ad Development Platform 02/04/11 InletTechnologies $95.00 Cisco Hardware Video & Media ABR Digital Media Processing 01/25/11 Wavesat Inc. $12.50 Cavium Networks, Inc. Semiconductor Wireless Broadband Wireless #7

8 About the Author Brent Lorenz, a Vice President in The McLean Group s headquarters office, has more than 15 years experience driving business development, sales and product management for such high technology companies as Texas Instruments, IBM and venture capital-funded startups. He focuses on M&A for embedded software firms and semiconductor manufacturers and specializes in smart phone, mobile consumer device, and enterprise telephony markets. Specifically, he targets firms developing products centered around technologies such as VoIP, video software, DSP software, code development tools, graphical user interface (GUI) tools, and device management software. The McLean Group Technology & Telecom Practice The Washington, DC area incubates a large number of technology companies serving the federal government, telecommunications and Internet industries. Many government agencies and corporations produce a steady stream of entrepreneurs who establish and grow successful middle market businesses in the region. We have served these regional technology firms among others nationally and worldwide. Whether product- or service-oriented, our research, analysis, valuation and investment banking professionals have experience with a broad array of technology companies. We are well-equipped to help our clients build value and close successful transactions. Brent Lorenz Vice President Headquarters Office office mobile blorenz@mcleanllc.com Have questions about embedded software? blorenz@mcleanllc.com About The McLean Group The McLean Group is a national, middle market investment bank providing mergers & acquisitions (M&A), capital formation, market intelligence, business valuation, litigation support and exit planning services. Headquartered in the Washington, DC metropolitan region s technology, communications and government contracting corridor, the firm is among the top middle market investment banks in the nation. M&A: The McLean Group uses its considerable expertise in a wide variety of industries to identify the most probable and suitable candidates to complete transactions under the most favorable terms for its clients. Market Intelligence: By leveraging superior competitive analyses, the firm provides business executives with comprehensive market intelligence reports, which provide the market insight and analytical expertise required to reduce risk and uncertainty in strategic decision making. Business Valuation: As a core competency and complement to its M&A business, The McLean Group provides business valuation services, including intangible asset and financial security valuations for a variety of transactions, financial reporting and tax purposes. 8